As the UK banking sector continues to resist pressure to open up lending to small- and medium-sized enterprises, start-up services for corporate borrowers are moving to fill the vacuum.
Kevin Caley's challenge to the UK banking industry started with a conversation at a business angels' presentation day in November 2010. Caley, who has run a small venture capital firm for almost three decades, met with a private investor who complained that he had spare capital, but was not willing to make any more high risk equity investments until his existing portfolio started to mature. He was looking, he said, for some small businesses to lend to.
Over lunch Caley floated the idea to a wider group of investors, the majority of whom, he said, were looking to deploy capital in something low risk without having to suffer the low interest rates offered by the banking sector.
Driving home after the meeting, Caley heard an item on the radio discussing the public uproar about "fat cat" bankers.
"I thought we needed a quick name, a short one that is easy to remember that implies we're not fat cats," Caley told CNBC.com.
Caley's new service, ThinCats, launches on Monday. An online marketplace, ThinCats links investors to established businesses in need of secured loans.
A network of sponsors prepares reports on companies seeking finance, which are then passed on to potential lenders. An online auction process sees lenders bidding down the interest rate.
Borrowers pay a listing fee of 450 pounds ($725) when the loan is auctioned, and ThinCats adds 1.5 percent to the interest rate as commission and to cover its costs. The sponsor receives a fee from the borrower.
Lenders bid a minimum of 1,000 pounds. At the end of each auction, a syndicate comprising the bidders offering the lowest interest rates is brought together, with the borrower receiving a weighted average of their interest rate bids.
ThinCats is still very small – in its pilot phase, the company has facilitated eight loans, totaling around 1 million pounds. However, it is representative of a set of new businesses that are stepping into the gap left behind by traditional banking services, who, in the post-credit-crunch world, have been slow to return to the small- and medium-sized enterprise (SME) market.
"High quality, blue-chip, very robust businesses that can weather any economic storm will probably have no difficulty in achieving funding," Tracy Ewen, managing director of invoice finance company IGF, told CNBC.com. "The crux of the matter is that most businesses don't actually fall into that category, unfortunately for them."
"I think a lot of this is historical. The banks two or three years ago were absolutely panned for over-lending and throwing money out of the door at anything that moved. We've got a complete reversal of that now that a couple of them are state-owned as well. They have a duty to ensure that banks' funding is most appropriately placed, but unfortunately that's had the knock-on effect of really damaging the SME market," she said.
The UK government has been under huge pressure to push the banks it bailed out with 850 billion pounds to start lending to small businesses again. Many have taken the opportunity instead to recapitalize, and lending has become concentrated, as Ewen said, at the top end of the UK's corporate food chain.
In February, the country's four largest banks, HSBC, Barclays, the Royal Bank of Scotland and Lloyds Banking Group, unveiled "Project Merlin", committing to make an additional 10 billion pounds available to small businesses. They also committed 2.5 billion pounds to the Business Growth Fund, which will invest in SMEs around the country.
In the meantime, however, non-bank lenders, such as IGF and ThinCats in the commercial space, and Wonga and Zopa in the personal finance arena, have sprung up to capitalize on consumers' and businesses' need for short-term cash.
ThinCats' Kevin Caley is convinced that the low overheads of his business, as well as the lack of centralized and arbitrary rules mean that peer-to-peer lenders and non-bank services will be sustainable.
"Sometimes (SMEs) can't get a bank loan for rather strange reasons. We had a company that was in the motor industry, a parts manufacturer, who approached us. They had been to their bank, they had been profitable, they had plenty of security, they wanted a loan… It got turned down because the bank had got a blanket restriction, they weren't giving any loans to businesses in the motor industry, just as a point of principle. The bank manager was very embarrassed about it," he said.
"I consider that sort of thing to be rather irrational, and I think we've got an opportunity there to be doing a deal with them," he said.
"There are other situations where the bank doesn’t understand the security, and we do - so for example if you've got intellectual property. A lot of our lenders are in business themselves, they understand the intellectual property side, and some of them are saying 'if this business goes bust, I can use the intellectual property they've got in my business'. They're not expecting to, but they understand the value of it."
The scalability of the model depends on the ability to build a bigger network of sponsors, as well as to build trust in the brand so that both companies and private lenders grow the market, Caley said. He is hoping that the UK's pension reforms, which give a greater flexibility in the tax regime for individuals to invest their own pension money, will provide a bigger pool of cash for these investments.
"There are quite a lot of people who have maybe 10,000 people per year which they save or put in a pension fund, or it's spare money. This is the sort of thing that we hope they'll find attractive," he said.
"Some of the large pension fund managers started to talk to us in January. We've had conversations, and they're starting to look at it from a due diligence point of view," he said.
Investors are taking interest. Tom Moore is an experienced business angel who has invested through peer-to-peer sites, including Zopa, and is now active on ThinCats.
When asked by CNBC.com what he hoped to achieve through the site, he said, "Ultimately, a higher return. At the moment, even Zopa is only generating about 5.5 percent. ThinCats is getting substantially more than that.
"Zopa was my first experience of peer-to-peer sites. I started playing around with about 5,000 pounds, and it all went out very rapidly and appears a very slick operation, but the interest rates on Zopa are dropping over time, very definitely. The supply of lenders is rising… I'm not prepared to lower my interest rates, so I'm going to have unemployed capital out there," he said.
"I've got a whole lot of capital that needs to be invested, I'm not that keen on the London Stock Exchange, hence my interest in the angel funds, which I think are doing much more valuable work on UK limited. This concept of backing companies with security struck me as a good lending basis," he said.
As the former head of a software business, Moore is comfortable with using intellectual property as security. He also well understands the difficulties of achieving bank finance in the current climate.
"The banks assure me they're there. I bank with two banks commercially and both of them assure me they're open for lending, but the experience of everyone I speak to who tries it is that they aren't," he said. On the personal finance side, he added, "Some of my accounts are getting 0.1 percent, which is a bit criminal, I think."
"I want Thincats to grow… I think it's an interesting asset," Moore said. "I hope it competes with the banks and keeps the banks straight. We need multiple sources of lending."